Humberto Cruz

For a pair of $199 shatterproof eyeglasses -- the lenses won't break but they may scratch -- the saleslady asked twice whether I wanted six-month insurance for $24.99 or a whole year for $34.99.

Thanks, but no thanks. I wouldn't spend a penny on this expensive "add-on" insurance for an unlikely loss I can easily cover myself.

"They are not doing you any favors when they sell you this type of insurance," said J. Robert Hunter, director of insurance for the Consumer Federation of America. "What they are doing is making money."

A ton of it. Hunter, who has studied the matter for years, estimates Americans spend "billions and billions of dollars" for add-on insurance, including overpriced title insurance on homes and other types of insurance on cars, furniture, electronics and travel, or to secure a loan.

"We have learned over the years this insurance is often way overpriced and frequently not needed at all," said Hunter, former federal insurance administrator under Presidents Gerald Ford and Jimmy Carter.

In many cases, Hunter said, the consumer is the victim of "reverse competition." That means the seller has insurance companies bid to see not which one will offer the lowest price to the consumer but who will give the seller the biggest commission or kickback.

To protect yourself, I suggest insuring only those risks you cannot comfortably cover yourself (for instance, if your house is destroyed by a fire or storm, or you suffer a major illness, or die prematurely without having provided properly for your dependents), or if the insurance is required by law. But we can do without -- or find better alternatives -- to costly "add-on" insurance.

For example, you may be offered "debt cancellation" insurance when you buy a car, home, furniture or other item for which you need to get a loan. Such insurance may pay off if you die, lose a job, suffer an accident or get sick before paying off a loan. But these policies usually pay very low benefits to people with claims -- on average less than 40 cents of each premium dollar, Hunter said.

As to title insurance when you buy a home, studies over the past 30 years have shown how title insurers offer payments and other considerations to real estate professionals for steering homebuyers to their products, driving up prices.

"Homebuyers assume that the transaction intermediaries (real estate agents, mortgage brokers and title agents) are acting in the buyers' interests, when in fact most intermediaries are acting in their own financial interests," Hunter told a House subcommittee looking at title insurance in 2006, describing a situation he says continues today. His recommendation: If you are buying a house, comparison shop for title insurance on your own.

With all types of add-on insurance, be cautious and take your time, Hunter recommends. Ask yourself three questions: Do I really need this insurance? Am I already covered under another policy, such as life or health or disability or home or auto insurance? If I need the insurance and don't already have it, is there a better place to get it?

For example, your homeowner's policy may cover losses during a trip, and many auto insurance policies and credit cards offer a collision damage waiver on rental cars. If you decide you need the protection and don't already have it, search for a policy on your own from an insurance company. Always compare prices by searching Internet sources and/or calling an insurance company or agent, Hunter said.

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Personal Finance - Costly 'Add-On' Insurance More About Profits Than Benefits

© Humberto Cruz